Saturday, December 24, 2011

FYI: Cal App Ct Holds Defaults Judgments In Quiet Title Actions Prohibited Under Calif Law, Evidentiary Hearing Required

The California Court of Appeal, Fourth District, recently held that
California law prohibits the entry of default judgments in quiet title
actions, and requires an evidentiary hearing in which both plaintiffs and
defendants can participate.

A copy of the opinion is available at:
http://www.courtinfo.ca.gov/opinions/documents/G044357A.PDF

A loan servicer purchased an individual condominium unit in its name at a
foreclosure sale. Plaintiff Harbour Vista, LLC purportedly was the lessee
of the land on which the entire condominium complex had been built. The
prior owner of the condominium unit had entered into a sublease with
Harbour Vista to rent the land occupied by the condominium unit, but was
eventually evicted by Harbour Vista for failure to pay the rent pursuant
to the sublease agreement. Harbour Vista filed a quiet title action
against HSBC and others, alleging a right to the condominium unit itself.


The servicer initially did not answer or otherwise respond to the
complaint, and Harbour Vista took a default. The servicer appeared at the
case management conference, notified the trial court of its intent to file
a motion to set aside the default, and asked to have that motion heard
before the court ruled on the default judgment. Nevertheless, without
holding an evidentiary hearing, the trial court entered a default judgment
for quiet title in favor of Harbour Vista.

The servicer filed a motion to set aside the default and vacate the
default judgment. The trial court denied the motion, as well as a
subsequent motion for reconsideration. The servicer appealed.

The Court of Appeal reversed and remanded, concluding that the lower court
erred by entering a default judgment in a quiet title action and had
improperly failed to conduct an evidentiary hearing.

As you may recall, California Code of Civil Procedure Sections 760.010, et
seq. govern the California quiet title process. Section 764.010 of that
statutory scheme provides in pertinent part, "The court shall not enter
judgment by default but shall in all cases require evidence of plaintiff's
title and hear such evidence as may be offered respecting the claims of
any of the defendants. . . . The court shall render judgment in
accordance with the evidence and the law."

Relying on what it referred to as the "unequivocal" statutory language,
the Court of Appeal concluded that Section 746.010 is an absolute
prohibition on the entry of default judgments in all quiet title actions
and that the statute additionally requires a court to hear evidence of the
parties' respective claims in every quiet title case.

In so holding, the court declined to follow Yeung v. Soos, 119 Cal. App.
4th 576 (2004), which held that Section 764.010 does not preclude the
entry of default judgments in quiet title actions, but only requires a
plaintiff to satisfy a higher standard of evidence than the prima facie
evidence ordinarily required following a defendant's default. In this
case, the appellate court determined instead that under Section 764.010,
the defendant retains the right, even after default, to participate in the
case and to present evidence before a judgment may be entered.

In addition, in light of the adversarial nature of quiet title actions,
the Court of Appeal noted that unless defendants are allowed to present
their own evidence, a court would be hampered in discharging its duty to
"render judgment in accordance with the evidence and the law," as required
by Section 764.010. The court stressed, however, that while allowing a
defaulting defendant the opportunity to participate in a quiet title
judgment hearing is unusual, the plaintiff may still take a defendant's
default, thereby putting the defendant at a distinct disadvantage.

Further, in addressing the type of hearing required by Section 764.010,
the Court of Appeal followed the determining factors set forth in TJX
Companies, Inc. v. Superior Court, 87 Cal. App. 4th 747 (2001)(plain
meaning of words used in the statute, context, statutory scheme, role of
judge, procedural remedies, validity of pending motions), and ruled that a
quiet title judgment requires a hearing in open court and that Section
764.010 implicitly permits evidentiary objections.


Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com


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FYI: Ill App Ct Confirms Legality of 365/360 Interest Calculation Method, Despite Alleged Ambiguities in Note

The Illinois Appellate Court, First District, recently held that a
lender's use of the 365/360 method to calculate interest did not violate
Illinois statutory law, despite allegations by the borrower of purported
ambiguities in the Note.

A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2011/1stDistrict/Dece
mber/1102690.pdf
.

The lender extended a line of credit to Hubbard Street Lofts, LLC
("Hubbard Street") in the amount of $6,400,000. Hubbard Street claimed
that the lender orally agreed to draft a loan document reflecting an
interest rate of 8% per year. The Note drafted by the lender reflected an
8% interest rate to be "computed on a 365/360 basis."

Hubbard Street filed a 7-count class action against the lender, alleging
usury in supposed violation of the Illinois Interest Act, as well as
several other statutory and common law violations. The allegations hinged
on the lender's use of the 365/360 method to calculate interest, as well
as the lender's alleged oral representation regarding the interest rate.
The lender moved to dismiss the complaint, arguing that the Illinois
Interest Act did not apply, and that the Credit Agreements Act barred
Hubbard Street's allegations regarding an alleged oral representation.

The lower court agreed, and dismissed all counts of Hubbard Street's
complaint with prejudice. Hubbard Street appealed.

As you may recall, the Illinois Interest Act provides that where a
contract does not specify a period of time for calculating interest,
"interest shall be calculated...as if 'per annum' or 'by the year' had
been added to the rate." 815 ILCS 205/9 (West 2010).

Although the Note provided for the 365/360 method to be used for interest
rate calculations, other portions of the Note did not reference a specific
period of time for those calculations. Therefore, Hubbard Street argued
that the Illinois Interest Act should apply to those portions of the Note,
thus purportedly contradicting the provisions regarding the 365/360 method
and rendering the Note ambiguous.

The Court noted it had recently considered a case with substantially
similar facts and allegations. In that case, the Court held that section 9
of the Illinois Interest Act "did not require a time period to be inserted
with each and every mention of an interest rate." Asset Exchange II, LLC
v. First Choice Bank, 2011 IL. App. (1st) 103718 ("Asset Exchange").
Consequently, the Asset Exchange Court found the Note in question to be
unambiguous.

Because "Illinois courts have held that section 9 of the [Illinois]
Interest Act...only applies when no time period for calculation of
interest appears anywhere in the instrument in question," the Court held
that Hubbard Street's counts related to the Illinois Interest Act were
properly dismissed.

Next, the Court held that Illinois Credit Agreement Act operated to bar
all actions based on oral credit agreements. See First National Bank in
Stanton v. McBridge Chevrolet, Inc., 267 Ill. App. 3d 367, 372, 643 N.E.
2d 138 (1994). Therefore, because the alleged agreement for an 8% annual
interest rate was not in writing, the Court held that Hubbard Street's
allegations related to the alleged oral agreement were barred by the
Credit Agreement Act.

Accordingly, the Court affirmed the judgment of the lower court dismissing
all count's of the plaintiff's complaint with prejudice.


Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com


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FYI: Conn Sup Ct Rules Note Holder Has Standing to Foreclose

The Connecticut Supreme Court recently confirmed that the holder of a
promissory note that is endorsed in blank has standing to mortgage
foreclosure proceedings under Connecticut law.

A copy of the opinion is available at:
http://www.jud.ct.gov/external/supapp/Cases/AROcr/CR303/303CR8.pdf.

When the defendant-borrower defaulted on her mortgage payments, plaintiff
RMS Residential Properties, LLC ("RMS") instituted foreclosure
proceedings. The borrower filed an answer, special defenses and a
counterclaim, contending among other things that RMS lacked standing to
institute a foreclosure action, because it was purportedly not the
rightful owner of the note at the time of the foreclosure action.

RMS filed an affidavit with the court, wherein its attorney-in-fact stated
that RMS, through its attorney, was the holder of the promissory note.
Both parties moved for summary judgment, and the lower court granted RMS'
motion. The borrower appealed.

On appeal, the borrower argued that RMS lacked standing to foreclose, and
contended that RMS' affidavit constituted an admission that it was not the
rightful owner of the debt. RMS responded that the holder of a note is
presumed to be the owner of the debt and may foreclose absent the
defendant rebutting that presumption.

The Court began its analysis by examining the relevant statutory law. It
noted that in Connecticut, a "person entitled to receive the money
secured" by a mortgage may foreclose on that mortgage, even absent
assignment of that mortgage. Conn. General Statutes Sec. 49-17. Further,
as the promissory note in question was endorsed in blank, the Court
observed that such an instrument "becomes payable to bearer and may be
negotiated by transfer of possession alone..." Id. at Sec.
42a-1-201(b)(21)(A).

The Court also examined the relevant case law in Connecticut, which
provides that the holder of a note endorsed in blank is entitled to a
presumption of ownership of the same.

With that framework in place, the Court found that as the holder of the
promissory note, RMS was entitled to a presumption that it was the owner
of the debt. Because the borrower did not rebut this presumption, the
Court held that "RMS was authorized by statute to commence this
foreclosure action." Therefore, it affirmed the lower court's judgment.


Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com


NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.


Our updates are available on the internet, in searchable format, at:
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CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

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Sunday, December 18, 2011

FYI: Fourth Cir Says Using Model Form H-8 in Refinancings by the Same Creditor Did Not Violate TILA

The U.S. Court of Appeals for the Fourth Circuit recently held that using
the incorrect model Notice of Right to Cancel form (i.e., using Model Form
H-8 in a refinancing by the same creditor) did not violate TILA.

A copy of the opinion is available at:
http://pacer.ca4.uscourts.gov/opinion.pdf/101915.P.pdf.

The borrowers refinanced their loan with the same lender that had
originally extended the loan. The lender provided the borrowers with
written notice of their right to cancel, using a form that was
substantially similar to Form H-8, the general rescission model form found
in Regulation Z, C.F.R. pt. 226. However, although the model form used by
the lender contained all of the information required by the Truth in
Lending Act ("TILA") and Regulation Z, it did not include some information
found in Form H-9, the model form designed specifically for refinance
transactions by the same creditor.

When borrowers defaulted, the lender scheduled a foreclosure sale. The
borrowers then notified the lender that they were rescinding the
transaction, arguing that the lender's use of Form H-8 was a material
violation of TILA disclosure requirements. The lender did not agree to
rescind the transaction, and the borrowers sued. The lower court granted
the lender's motion to dismiss, on the grounds that the disclosures
provided fully satisfied TILA and Regulation Z. The borrowers appealed.

Although TILA includes a provision requiring the creation of model
disclosure forms to facilitate compliance with its disclosure
requirements, it also provides that "[n]othing in this subchapter may be
construed to require a creditor to use any such model form or clause..."
15 U.S. Sec. 1604(b).

The Fourth Circuit began by scrutinizing the form provided to the
borrowers by the lender, and concluded that it contained "all of the
information required" by TILA and Regulation Z.

The Court then examined the arguments of the parties on appeal. The
borrowers noted that they were not provided with notice that rescinding
their refinance transaction would affect only the new amount financed, and
not the original mortgage loan. Had the lender used Form H-9, the
borrowers would have received such notice. The borrowers contended that
the lender's failure to provide that notice was a material violation of
TILA's disclosure requirements. The lender argued that neither TILA nor
Regulation Z contained any requirement to provide borrowers with such
notice.

The Court agreed with the lender. It noted that neither TILA nor
Regulation Z distinguish between initial and refinancing transactions.
Further, the Court noted that TILA provides that lenders comply with
TILA's requirements even if they modify the sample forms provided by
"deleting any information which is not required by this subchapter." 15
U.S.C. Sec. 1604(b).

Therefore, because the lender's "notice to the [borrowers] fulfilled each
requirement imposed by TILA and by Regulation Z...it is an unsustainable
argument to maintain that its notice in violation of TILA." Accordingly,
the Fourth Circuit affirmed the judgment of the lower court.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com


NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.


Our updates are available on the internet, in searchable format, at:
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CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.